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by Charalambos Pissouros

Weekly Outlook: May 27 – May 31: BoC Rate Decision, German CPI and US core PCE

After a week marked by concerns surrounding the US-China dispute and uncertainty over the UK political landscape, investors are likely to continue monitoring developments on those fronts. With regards to central banks, the BoC decides on interest rates on Wednesday. The forecast is for policymakers to keep interest rates unchanged and thus, if this is the case, all the attention is likely to fall to the accompanying statement. As for the data, Germany’s preliminary inflation prints for May are due to be released, as well as the US core PCE index for April.

Monday is a quiet day, with no important economic releases on the agenda. Both the UK and the US markets will be closed due to the Spring Bank Holiday and the Memorial Day respectively.

We don’t get any top-tier UK data during the rest of the week either, but GBP-traders are likely to keep their gaze locked on the political landscape. Following UK PM Theresa May’s announcement on Friday that she will step down, several Tory members have shown interest in replacing her, with media suggesting that about a dozen are considering to take part in the race. All of them support that they could unite Parliament and build consensus, or even amend the existing Brexit accord, even though the EU has made it clear that it will not renegotiate. According to news reports, most of the contenders are pro-Brexit and prepared to leave the EU without a deal if needed. With Boris Johnson the clear favorite with bookmakers, the probability for a no-deal Brexit in the end of October remains decent in our view.

On Tuesday, during the European morning, Switzerland’s GDP for Q1 is due to be released and the forecast suggests that the economy accelerated to +0.3% qoq from +0.2%. Although this would be encouraging news for SNB policymakers, we don’t believe that they will be tempted to alter their policy stance when they meet in June. Swiss inflation stood at +0.7% in April, well below the Bank’s objective of 2%. Even with interest rates at -0.75%, policymakers expect the CPI rate to be at +1.5% yoy in Q4 2021. With the Swiss franc strengthening notably lately due to the increased tensions between China and the US, we believe that they will stick to their guns, keeping interest rates on hold and staying willing to intervene in the FX market when necessary. On May 10th, SNB Chairman Thomas Jordan said that the Bank needs to stick to its current policy framework of negative rates and foreign exchange interventions to protect the country’s economy, which adds more credence to our view.

From the US, we get the Conference Board consumer confidence index for May, which is expected to have risen to 130.1 from 129.2.

On Wednesday, the highlight is likely the BoC monetary policy decision. The forecast is for policymakers to keep interest rates unchanged at +1.75%, and thus, if this is the case, all the attention is likely to fall to the statement accompanying the decision. It is worth noting that this will be one of the “smaller” meetings, where we don’t get updated economic projections neither a press conference by Governor Poloz.

Bank of Canada interest rates

When they last met, BoC officials fully dropped their hiking bias, noting that an accommodative policy rate continues to be warranted and that they will “evaluate the appropriate degree of monetary policy as new data arrive”. This was the first statement since the end of 2017 without any reference to “future rate increases”. Having said that, last week, BoC Governor Stephen Poloz said he believes that interest rates are likely to still go up “a bit”, if their expectations with regards to a temporary economic slowdown come true.

However, we don’t expect officials to alter their forward guidance at this meeting. After all, they dropped the reference to future rate increases at a meeting, just after which the Governor noted that the slowdown is likely to prove to be temporary. What’s more, in his most recent speech, Poloz also said that the Bank’s decision was triggered by an abrupt and synchronous slowdown, stoked by trade uncertainty. Therefore, with that uncertainty spiking again in the last few weeks, we believe that policymakers may prefer to wait for a while more before they start examining whether they should bring “future rate increases” back to their statement.

As for Wednesday’s economic indicators, Sweden’s GDP for April is due to be released, and the consensus is for a slowdown to +0.2% qoq from +1.2%, which would drive the yoy rate down to +1.8% from +2.4%. That said, this would still be above +1.7%, which is the Riksbank’s forecast for 2019, and thus, we doubt that it would raise concerns around monetary policy. At their latest meeting, policymakers decided to push back the timing of when they expect interest rates to rise further, noting that “The repo rate is expected to be raised again towards the end of the year or at the beginning of next year”. Following the better-than-expected inflation data for April, a GDP rate above the Bank’s own forecasts may keep the door open for a year-end hike. However, we prefer not to rush into conclusions as the next Riksbank meeting is scheduled for July 2nd, and up until then we will have the May inflation data in hand, which will put us in a better position to examine whether the world’s oldest central back could hike this year, or not.

On Thursday, it is Ascension Day in Switzerland, Sweden and Norway, and therefore, the respective markets will be closed.

In the US, the second estimate of Q1 GDP is due to be released and the forecast suggests a downside revision to +3.1% qoq SAAR from +3.2%. In our view, this data may pass unnoticed as we already have models and indicators suggesting how the economy has been performing during Q2. Investors are also likely to stay more focused on releases concerning May and onwards for clues on how and whether the latest trade tensions have impacted the economy.

Finally, on Friday, during the Asian morning, we get the usual end-of-month data dump from Japan. The unemployment rate for April is forecast to have ticked down to 2.4% from 2.5%, while the jobs-to-applications ratio is expected to have remained unchanged at 1.63. No forecast is available for the headline Tokyo CPI for May, but the core rate is anticipated to have ticked down to +1.2% yoy from +1.3% in April. Retail sales for April are expected to have increased +1.0% yoy, the same pace as in March, while preliminary industrial production data is forecast to show a 0.2% mom rebound after a 0.6% slide the month before.

China’s manufacturing and non-manufacturing PMIs for May are also coming out. The manufacturing index is anticipated to have slid back to contractionary territory, after staying above 50 for two months. Specifically, it is expected to have slid to 49.9 from 50.1. As for the non-manufacturing print, it is expected to have remained unchanged at 54.3. Following last week’s disappointing PMIs from both the Eurozone and the US, another disappointment from China could revive fears that the latest escalation in US-China tensions could jeopardize global growth.

During the European morning, we get German retail sales and preliminary inflation numbers for April and May respectively. Retail sales are expected to have rebounded 0.4% mom, after sliding 0.2% in March, something that will drive the yoy rate into positive territory, to +1.1% from -2.1%. With regards to inflation data, both the CPI and HICP rates are anticipated to have declined, to +1.6% yoy and +1.4% yoy from +2.0% and +2.1% respectively. Something like that could raise speculation that the headline CPI rate for the Eurozone as a whole, due out on June 4th, could move in a similar fashion. Coming on top of the bloc’s disappointing PMIs, slowing inflation could prompt investors to raise more bets with regards to additional policy measures by the ECB, beyond the new round of TLTROs, as well as for another delay in the timing of when interest rates could start rising.

German vs Eurozone CPIs inflation

Later, from the US, we get personal income and spending data for April, as well as the core PCE for the month. Personal income is forecast to have accelerated to +0.3% mom from +0.1%, but bearing in mind that the monthly earnings rate for the month held steady, we see the risks surrounding the income forecast as tilted somewhat to the downside. Spending is anticipated to have slowed to +0.2% mom from +0.9%, something supported by the slide in April’s retail sales.

US CPIs vs core PCE inflation

With regards to the yoy rate of the core PCE, which is the Fed’s favorite inflation gauge, it is expected to have remained unchanged at +1.6%. Nevertheless, given that the core CPI rate for the month ticked up, we see the risks surrounding the core PCE forecast as tilted slightly to the upside. At their latest gathering, Fed officials agreed that their “patient” approach on monetary policy could remain appropriate “for some time”, but that was before the latest escalation in the US-China dispute, which prompted investors to increase notably their rate-cut bets. According to the Fed funds futures, there is currently a 76% chance for interest rates to be lower by year end, while a month ago, that percentage was at 65%. Thus, even if the yoy core PCE rate rises somewhat, we doubt that it could materially affect expectations over the Fed’s future course of action.

US Fed funds futures Market vs FOMC interest rate expectations

From Canada, we get GDP data for Q1 and March. The qoq annualized rate is anticipated to have risen to +0.7% from +0.4% in Q4 2018, while the mom rate for March is anticipated to have risen to +0.2% from -0.1%. This could be encouraging news for BoC Governor Poloz, who after the previous gathering noted that the economic slowdown is likely to prove temporary, and may allow policymakers to start re-evaluating the case of turning slightly hawkish at one of their upcoming gatherings. That said, apart from improving domestic data, we believe that some easing in the US-China trade spat is needed before Canadian policymakers get more confident over future rate increases.

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